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A Simple Model for the Study of Shorting Stocks

C.B Garcia
The Journal of Investing Summer 2009, 18 (2) 62-68; DOI: https://doi.org/10.3905/JOI.2009.18.2.062
C.B Garcia
is a retired professor of Management Science, Graduate School of Business at the University of Chicago, residing in Rancho Santa Fe, CA.
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  • For correspondence: cbgarcia@cox.net
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Abstract

Based on a simple quantitative model, arguments for and against the shorting of a stock are presented for the following issues: 1) short selling causes the stock’s market price to fall, 2) short selling adds liquidity to the stock, 3) short selling causes the stock’s expected return to rise, 4) short selling increases the stock’s volatility, 5) short selling should be allowed only in the derivatives market, 6) short selling reduces capital for new investments, and 7) short selling may cause a “depression trap” (i.e., where the stock’s market price is stuck at an extremely depressed level, despite a more than adequate number of reasonable bids).

TOPICS: Quantitative methods, volatility measures, risk management

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The Journal of Investing
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Summer 2009
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A Simple Model for the Study of Shorting Stocks
C.B Garcia
The Journal of Investing May 2009, 18 (2) 62-68; DOI: 10.3905/JOI.2009.18.2.062

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A Simple Model for the Study of Shorting Stocks
C.B Garcia
The Journal of Investing May 2009, 18 (2) 62-68; DOI: 10.3905/JOI.2009.18.2.062
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  • Article
    • Abstract
    • THE BASIC MODEL
    • ISSUE 1: SHORT SELLING CAUSES THE STOCK’S MARKET PRICE TO FALL
    • ISSUE 2: SHORT SELLERS ADD LIQUIDITY TO THE STOCK
    • ISSUE 3: SHORT SELLING CAUSES THE STOCK’S EXPECTED RETURN TO RISE
    • ISSUE 4: DOES SHORT SELLING INCREASE THE STOCK’S VOLATILITY?
    • ISSUE 5: SHOULD INVESTORS BE ALLOWED TO SHORT A STOCK ONLY IN THE DERIVATIVES MARKET?
    • ISSUE 6: SHORTING MAY REDUCE NEW INVESTMENT IN THE STOCK MARKET
    • ISSUE 7: SHORTING MAY CAUSE A “DEPRESSION TRAP”
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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